Chapter 4

State Strategies for Innovation

While U.S. universities have played an important role as drivers of local innovation for well over a century, state governments have emerged as major promoters of innovation much more recently. While some modern state economic development efforts can be traced back to the early Twentieth Century, the focus on strategies for innovation-based development has grown in recent years.1 First-generation industrial promotion programs frequently included a science or research dimension, but in most cases, placed primary emphasis on buttressing and retaining existing industrial sectors and recruiting major companies from other states.2 Today, there is a growing emphasis on the growth of local innovation ecosystems and the role they can play in revitalizing older manufacturing sectors, helping new industries arise out of the established

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1State-driven economic development efforts are traceable back to the early federal period. In 1791, the New Jersey Legislature authorized the incorporation of Alexander Hamilton’s Society for Establishing Useful Manufactures as an institution for industrial development, extending to it a state tax exemption, the power to condemn property for its own use and legal control over much of the water supply of Northern New Jersey. Peter K. Eisinger, The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States, Madison: The University of Wisconsin Press, 1988, p. 15. The Erie Canal was built largely as a result of the efforts of New York Governor, DeWitt Clinton who persuaded the New York legislature to approve and support the project. Evan Cornug, The Birth of Empire: DeWitt Clinton and the American Experience, 1769-1828, Oxford: Oxford University Press, 2000, p. 8. Enactment of Right to Work Laws prohibiting the closed union shop began in the South in the 1940s, spreading to Great Plains and Mountain states, reducing labor costs as an inducement to attract manufacturing firms from states with a high percentage of unionized workers. Eisinger, The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States, op. cit., pp. 165-167.

2For a review of the relevant policy landscape up to the mid 1990s, see Kevin T. Leicht and J. Craig Jenkins, “Three Strategies of State Economic Development: Entrepreneurial, Industrial Recruitment, and Deregulation Policies in the American States,” Economic Development Quarterly 8(3):256-269, August 1994. The authors find “evidence of three general approaches: (1) an entrepreneurial approach focusing on new firm and technology development; (2) an industrial recruitment strategy emphasizing financial incentives for the relocation or expansion of existing enterprises; and (3) a deregulation approach that minimizes governmental control over private enterprise.”



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Chapter 4 State Strategies for Innovation While U.S. universities have played an important role as drivers of local innovation for well over a century, state governments have emerged as major promoters of innovation much more recently. While some modern state economic development efforts can be traced back to the early Twentieth Century, the focus on strategies for innovation-based development has grown in recent years.1 First-generation industrial promotion programs frequently included a science or research dimension, but in most cases, placed primary emphasis on buttressing and retaining existing industrial sectors and recruiting major companies from other states.2 Today, there is a growing emphasis on the growth of local innovation ecosystems and the role they can play in revitalizing older manufacturing sectors, helping new industries arise out of the established 1 State-driven economic development efforts are traceable back to the early federal period. In 1791, the New Jersey Legislature authorized the incorporation of Alexander Hamilton’s Society for Establishing Useful Manufactures as an institution for industrial development, extending to it a state tax exemption, the power to condemn property for its own use and legal control over much of the water supply of Northern New Jersey. Peter K. Eisinger, The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States, Madison: The University of Wisconsin Press, 1988, p. 15. The Erie Canal was built largely as a result of the efforts of New York Governor, DeWitt Clinton who persuaded the New York legislature to approve and support the project. Evan Cornug, The Birth of Empire: DeWitt Clinton and the American Experience, 1769- 1828, Oxford: Oxford University Press, 2000, p. 8. Enactment of Right to Work Laws prohibiting the closed union shop began in the South in the 1940s, spreading to Great Plains and Mountain states, reducing labor costs as an inducement to attract manufacturing firms from states with a high percentage of unionized workers. Eisinger, The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States, op. cit., pp. 165-167. 2 For a review of the relevant policy landscape up to the mid 1990s, see Kevin T. Leicht and J. Craig Jenkins, “Three Strategies of State Economic Development: Entrepreneurial, Industrial Recruitment, and Deregulation Policies in the American States,” Economic Development Quarterly 8(3):256-269, August 1994. The authors find “evidence of three general approaches: (1) an entrepreneurial approach focusing on new firm and technology development; (2) an industrial recruitment strategy emphasizing financial incentives for the relocation or expansion of existing enterprises; and (3) a deregulation approach that minimizes governmental control over private enterprise.” 69

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70 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES TABLE 4-1 Large Recruitment Incentives Incentive (Millions Company Year Site State of Dollars) Boeing 2003 Everett WA 1, 984 AMD 2006 Malta NY 1,118 ThyssenKrupp 2007 Mt. Vernon AL 734 Scripps 2003 Palm Beach FL 567 IBM 2000 East Fishkill NY 533 Volkswagen 2008 Chattanooga TN 450 Kia 2006 West Point GA 353 Toyota 2006 Blue Springs MS 292 Nissan 2000 Canton MS 290 Sematech 2007 Albany NY 269 Dell 2004 Winston-Salem NC 242 Hyundai 2002 Montgomery AL 234 Ford 2006 Detroit MI 220 Toyota 2003 San Antonio TX 218 manufacturing base, and in recruiting out-of-state firms with knowledge-based incentives rather than (or in addition to) traditional fiscal and infrastructure incentives.3 FROM INDUSTRIAL RECRUITMENT TO SCIENCE-BASED DEVELOPMENT Industrial Recruitment The modern practice of systematic promotion of local industry began in the first decades of the Twentieth Century, when southern states sought to attract companies by offering tax incentives, capital, and subsidized plant and industrial sites4. The practice of industrial recruitment eventually spread to the rest of the country and evolved from “smaller deals with manageable incentive amounts in the 1950s and 1960s to fiercely competitive megadeals involving hundreds of 3 For a review of the growth and scope of contemporary innovation-based economic development policies by U.S. cities, regions and states, see David B. Audretsch and Mary L. Walshok, Creating Competitiveness, Entrepreneurship and Innovation Policies for Growth, Northampton, MA: Edward Elgar, 2013. 4 In 1971, the New Jersey legislature incorporated Alexander Hamilton’s private firm, the Society for Establishing Useful Manufactures, to promote industrial development. The society received a state tax exemption, control over much of the water supply of northern New Jersey and the power to condemn property for its own use. Eisinger, The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States, op. cit., p. 15.

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STATE STRATEGIES FOR INNOVATION 71 millions in corporate tax breaks and cash giveaways from the 1980s onward.”5 A recent survey of the biggest incentive deals in the United States between 1999 and 2011 revealed thirteen transactions in which states paid companies incentives in excess of $200 million and in one case, nearly $2 billion.6 The so-called recruitment incentives aimed at attracting businesses led contemporary media to characterize them as “blind smokestack chasing” or “buffalo hunts” and a zero-sum “economic war between the states.”7 Companies have found that they can force states into bidding wars over locational decisions to extract the maximum concessions with respect to incentives.8 In 2004, Dell agreed to build a factory in North Carolina’s Piedmont Triad, after the state— that prided itself on the lack of corporate incentives on its books—agreed to a $242 million package of tax incentives over a 15 year period. A local observer commented that Dell has turned the art of negotiating economic development into a science by taking the same approach to incentives that it does to the rest of its business, steadily ratcheting up the stakes. More than a decade ago, Round Rock, Texas offered Dell a 60-year package of tax refunds that eventually drew the company's headquarters out of Austin... six years after its deal with Round Rock, Dell wrangled a 40- year, $166 million package of grants and tax breaks from Nashville, Tenn… few communities or their elected officials are willing to call a company's bluff when jobs are at stake.9 While academic criticism of competition between states to attract companies through incentives is not altogether misplaced, it overlooks the fact that some state recruitment efforts have attracted innovative companies that have put down local roots, undertaken extensive local investments (including training programs and major contributions to local universities) and which have had very positive long-term local economic impacts.10 Perhaps the most salient example 5 Nichola Lowe, “Southern Industrialization Revisited: Industrial Recruitment as a Strategic Tool for Local Economic Development,” in The Way Forward: Building a Globally Competitive South, Chapel Hill: Global Research Institute, 2011. 6 Kenneth P. Thomas, Investment Incentives and the Global Competition for Capital, Basingstoke: Palgrave MacMillan, 2011, p. 99. 7 Walter H. Plosila, “State Science and Technology-Based Economic Development Policy: History, Trends and Developments and Future Directions,” Economic Development Quarterly 18(2):114, 2004. 8 “As Companies Seek Tax Deals, Governments Pay High Price,” New York Times December 1, 2012; “State Should Stay Out of Investing In Plants,” The Times Union June 9, 2012. 9 “Some Believe Incentives are Wasted on Big Business—More Bang for the Buck Might Come from Helping Smaller Businesses, Which Could Create More Jobs,” Greensboro News & Record, November 30, 2004. 10 For a balanced examination of the debate over the value and effectiveness of incentives as a development tool, see Jonathan Q. Morgan, “Using Economic Development Incentives: for Better or for Worse,” Popular Government Winter 2009.

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72 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES of a successful recruitment initiative involving knowledge-based industries is the creation of North Carolina’s Research Triangle Park, described in the Annex to this report. Another example is Texas’ victory in the 1987-88 competition between states to secure the SEMATECH consortium, in which Texas prevailed because of the presence of the University of Texas at Austin and the state’s commitment to enhance the university’s microelectronics infrastructure.11 More recently, New York has successfully implemented a university-based recruitment strategy that has led to the creation of a semiconductor manufacturing cluster in the region around Albany, including, ironically, the transfer of SEMATECH headquarters from Texas to New York.12 The Emergence of State Science Economic Development Policies During the 1960s, formal state advisory bodies were set up with the support of the Commerce Department’s State Technical Services Program (STS), which was cancelled by the Nixon Administration. In 1977, Congress authorized the National Science foundation to set up the State Science, Engineering, and Technology (SSET) program to support the development of science and technology strategic plans by the states. As a result of these programs, by the end of the 1970s, most U.S. states had some form of science and technology advisory organization associated with their government. These entities offered planning and advice to governors, but in general did not engage industry or state economic development bureaucracies.13 During the 1970s, the U.S. was buffeted by rising energy costs, inflation, and intensifying international competition. A severe economic slowdown in the early 1980s hit traditional manufacturing industries particularly hard, and the term “rust belt” came into popular use in reference to large areas of the industrialized Midwest, Northeast, and Upper South. The erosion of U.S. manufacturing is observable in high technology industries as well as traditional sectors. The U.S. trade balance has shifted from surplus to deficit since 2001, with an $81 billion deficit in 2010. With this decline, the U.S. has lost research and development activity associated with manufacturing to other countries. Job losses in the advanced manufacturing sector are of particular concern because 11 “The university was cited by SEMATECH as a main reason they chose Texas over 11 states that competed for the high tech prize.” “UT Officials Elated at SEMATECH Decision,” The Dallas Morning News, January 11, 1988; “SEMATECH Research Contract Approved by UT Regents— University to Study Semiconductor Manufacturing,” Austin American-Statesman February 10, 1989; “State Board OKs $38 Million in Bonds for Project by UT,” Houston Chronicle February 17, 1988. 12 See Chapter 7. 13 Walter H. Plosila, “State Science and Technology-Based Economic Development Policy: History, Trends and Developments and Future Directions,” Economic Development Quarterly 18(2):115, 2004.

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STATE STRATEGIES FOR INNOVATION 73 high technology workers earn 50 to 100 percent more than the average of workers in all other fields.14 With the decline of manufacturing during and after the 1970s, U.S. states began to rethink their development strategies and the focus on the entrepreneurial dynamism evident in areas such as Silicon Valley, Route 128, and North Carolina’s Research Triangle. Texas revolutionized incentives competition in the early 1980s by recruiting the research consortia Microelectronics and Computer Technology Corporation (MCC) and SEMATECH using not only traditional lures like tax abatements and infrastructure improvements but also endowed university chairs and access to talent pools. In a major reappraisal a number of states, realized they had not been engaging their universities in economic development; even fewer had thought of talent not as a mere commodity but as a discriminating vehicle for the future growth of state and regional economies …unlike the many previous chases for auto, steel, brewery, and other durable manufacturing branch facilities, this competition began a change in direction for state economic development to one involving talent, technology, and capital, not one just focused on traditional real estate issues of financing bricks and mortar.15 The 1980s saw a profusion of advanced technology programs at the state level, which featured aspects such as university-industry government R&D projects, promotion of start-ups using policy tools such as incubators and venture capital pools, and the provision of vocational and technical education and training. Cooperative research centers or “centers of excellence” were established pursuant to new state initiatives, including Ohio’s Thomas Edison Program and New York’s Centers for Advanced Technology programs.16 At present, all fifty U.S. states incorporate science and technology programs in their economic development strategies.17 The recession of 2008-09 hit state budgets hard, and by 2010, 44 states had budget deficits.18 However, a number of states that had committed to long- 14 President’s Council of Advisors on Science and Technology, Report to the President on Ensuring American Leadership in Advanced Manufacturing, June 2011, pp. i, 9. 15 Walter H. Plosila, “State Science and Technology-Based Economic Development Policy: History, Trends and Developments and Future Directions,” Economic Development Quarterly, 18(2)115-116, 2004. 16 Irwin Feller, “Evaluating State Advanced Technology Programs,” Evaluation Review 12(3):233, 1988. 17 Susan E. Cozzens, et al, “Distributional Effects of Science and Technology-Based Economic Development Strategies at State Level in United States,” Science and Public Policy February 2005, p. 32. National Research Council, Building the Arkansas Innovation Economy: Summary of a Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2012, p. 59.

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74 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES term efforts to promoting innovation have sustained funding through the period 2008-13. Ohio voters approved an additional $700 million for the state’s Third Frontier innovation institute in 2010.19 New York has sustained financial support for its nanotechnology initiative in the years since the 2008 financial crisis, including a $400 million contribution to SUNY Albany’s College of Nanoscale Science and Engineering in 2011.20 A recent study of Arkansas’ innovation initiative reported in 2012 that the state’s knowledge-based economy initiatives focused on research have received $61.2 million in state funding from 2008 through 2011 and leveraged on additional $191.8 million in non-state support.”21 Academic Recruitment Traditional state industrial recruitment methods, such as the offer of tax abatements, infrastructure concessions, and financial assistance to companies, are increasingly being augmented—if not displaced altogether—by knowledge- based measures, including training programs, upgrading of university research infrastructure, buildout of broadband networks, and establishment of medical research centers. Perhaps most significantly, an intensive competition has developed between universities for science and engineering faculty members conducting cutting-edge research. The most sought-after faculty members are often holders of “endowed chairs,” positions backed by donor funds that generate an income stream that compensates the faculty member and provides for research support. The offer of an endowed chair position can be a compelling inducement to attract sought after researchers as well as their post-doctoral fellows, who are young people in their most productive years. “What is generally agreed upon is that endowed chairs represent an important tool in building a research hub capable of attracting big federal grants, commercializing technology, and spawning start-up companies.”22 Following the lead of Virginia and Ohio, the state of Georgia launched a formal program in 1992 to attract top flight research faculty to the state with the creation of the Georgia Research Alliance, a consortium of six universities, business leaders, and government officials.23 The Alliance implemented the Eminent Scholars program, creating endowed chairs at universities in the state funded initially at about $750,000 a piece, to be matched by the host institution. The Eminent Scholars program targeted entrepreneurial faculty, in particular many of whom had already founded companies or who were looking to commercialize ideas they had already developed. By 2010, not quite two 19 “Third Frontier Win was Big, Not Easy,” Dayton Daily News May 6, 2010. 20 Presentation by Pradeep Haldar, CNSE, Vice President, Troy, New York, April 3, 2013. 21 Battelle Technology Partnership Practice, Arkansas’s Knowledge Economy Initiatives: Analysis of Progress and Recommendations for the Future, November 2012, p. ES-2. 22 “Universities Need to Court Top-Tier Researchers,” The Plain Dealer March 31, 2002. 23 See Maryann P. Feldman, Lauren Lanahan and Iryna Lendel, Experiments in the Laboratories of Democracy: State Scientific Capacity Building, Economic Development Quarterly, forthcoming.

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STATE STRATEGIES FOR INNOVATION 75 decades after the launch of this program, the Georgia Research Alliance had attracted 60 of the country’s eminent researchers who had secured $2.6 billion in federal and state research grants, created at least 150 start-up companies, 5,000 high tech jobs, and generated discoveries with potential applications benefitting 100 local companies.24 In one dramatic episode, the Medical College of Georgia in Augusta “raided” Yale “pretty heavily,” attracting nine scientists specializing in molecular biology, including Dr. Howard Rasmussen, an extremely highly- regarded cell-signaling scholar.25 A 2013 state audit of the Eminent Scholars Program concluded that in 2012, Eminent Scholars and their research teams attracted about $270 million to non-state funding for research, supporting around 1,400 jobs at the state’s universities.26 The Eminent Scholars concept is being replicated in other states.27 In 2002, the legislature of South Carolina passed the Endowed Chairs Act, funding an initiative to attract top-quality academic researchers.28 Ohio has used a similar program authorizing the state Board of Regents to endow faculty chairs, and additional funds have been made available from revenue land issues to fund endowed chairs.29 THE MICHIGAN BATTERY INITIATIVE Michigan’s efforts to diversify its economy through the establishment of industrial clusters have been led by the Michigan Economic Development Corporation (MEDC), a state economic development corporation. At the onset of the global financial crisis in 2008, Michigan Governor Jennifer Granholm tasked MEDC with devising a strategy to diversify the state’s economy beyond the auto industry.30 MEDC devoted a substantial effort to the study of industrial 24 Georgia’s Technology Scholars Get a Tip of the Hat from Miller,” The Atlanta Journal- Constitution April 15, 1998; “Research Group Supportive of UGA Scientists,” Atlanta Banner- Herald September 26, 2010. 25 “Augusta College Builds Program by Raiding Yale,” The Atlanta Journal-Constitution, May 6, 1993. 26 Of the total reported, about $108 million was attributable to the scholars themselves and the other $162 million a result of the work of the scholar’s research teams and centers. Of the $108 million associated with the scholars themselves, $46.3 million, or 43 percent, was associated with the work of 6 scholars out of the total 64. Georgia Department of Audits and Accounts, Performance Audit Division, Georgia Research Alliance: Requested Information on State-Funded Activities, January 2013, p. 17. 27 “Initiative Seeks Top Researchers: $143 Million Goes to Universities for Cutting Edge Solutions,” The Plain Dealer May 21, 2008. 28 Presentation of David McNamara, South Carolina Research Authority, “Building the South Carolina Innovation Ecosystem,” National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, C. Wessner, Rapporteur, Washington, D.C.: The National Academies Press, 2011, p. 15. 29 “Universities Need to Court top-Tier Researchers,” Cleveland The Plain Dealer March 31, 2002. 30 At that time, Michigan had the nation’s highest unemployment rate, losing nearly 1 million manufacturing jobs as the crisis unfolded. Doug Parks, “Battery Initiative in Michigan,” in National

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76 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES acceleration and clustering models around the world, and was particularly impressed with Sweden’s application of the so-called “triple-helix” model.31 MEDC developed a cluster strategy based on Michigan’s intrinsic strengths, which included a highly developed manufacturing sector, natural resources such as the Great Lakes. The state targeted six thematic areas for cluster development, which were advanced energy storage, solar power, wind turbine manufacturing, bio-energy, defense, and advanced materials and manufacturing. Having identified thematic clusters MEDC set up cross-functional teams to develop roadmaps for each sector, with each team comprised of representatives from universities, industry, venture capital and other fields. The state deployed an array of incentives to support the clusters, including tax credits and the establishment of “Centers of Energy Excellence.”32 Michigan sustained aggressive investments in the cluster effort despite a budget deficit exceeding $1 billion.33 Advanced energy storage is closely associated with the future of Michigan’s auto industry. Electric-powered and hybrid motor vehicles are Research Council, Clustering for 21st Century Prosperity: Summary of a Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2012. 31 The triple helix model assigns an enhanced role to universities in government/industry/university innovation collaboration. “The common objective is to realize an innovative environment consisting of university spin-off firms, tri-lateral initiatives for knowledge-based economic development, and strategic alliances among firms (large and small, operating in different areas, and with different levels of technology), government laboratories, and academic research groups. These arrangements are often encouraged, but not controlled, by government, whether through new "rules of the game," direct or indirect financial assistance, or through the Bayh Dole Act in the U.S.A” or the creation of new policy actors. Etkowitz, Henry and Loet Leydesdorff, “The Dynamics of Innovation: From National Systems and ‘Mode 2’ to a Triple Helix of University-Industry-Government Relations,” Research Policy pp. 109, 112, 2000. 32 The Centers of Energy Excellence program awarded state grant funds to partnerships between companies, on the one hand, and universities or federal laboratories, on the other hand. The university is engaged either with supply chain issues or a specific technology. State funds are matched by the private sector, universities, and federal laboratories. The centers of excellence are modeled after those in Sweden, which feature an anchor company supported by universities and the Swedish government. MEDC was particularly impressed with a Swedish collaboration at a pulp and paper mill north of the Arctic Circle that developed technology to convert a chemical waste, “black liquor,” into biofuels. A MEDC official commented that “what we thought was compelling was that they brought together federal agencies, end users, and the value chain. All of those resources were focused on solving the problem, which the Swedes thought could provide 10 to 15 percent of their biofuel requirements.” Doug Parks, “Battery Initiative in Michigan,” in National Research Council, Clustering for 21st Century Prosperity: Summary of a Symposium, op. cit. 33 “Anchor Tax Credits” provided rebates based on personal income tax, paid by employees and investments, and were designed to encourage high technology supply chains in Michigan. “Advanced Battery Credits” of $1 billion refunded business taxes, paid by companies manufacturing battery cells and battery packs and engaged in advanced battery engineering. “Photovoltaic Tax Credits” gave companies investing in manufacturing plants for photovoltaic technology, systems or energy a credit equal to 25 percent of the investment. Technology Collaboration Tax Credits” encouraged strategic innovation collaborations involving small companies. Firms receive credits for investing in companies employing 50 or fewer people and under $10 million in revenue. Ibid. 104- 105

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STATE STRATEGIES FOR INNOVATION 77 widely viewed as a necessary response to the rising cost of fossil fuels, energy import dependency, and the need to reduce greenhouse gas emissions.34 A major obstacle to the widespread adoption of electric and hybrid vehicles, however, is the cost of the battery packs, which account for one-third of the cost of the electric car.35 A number of foreign countries regard the advanced-battery industry as strategic, and have committed substantial resources to the development of lower-cost, higher-performing batteries for electric vehicles.36 Much of this effort has been directed toward development of lithium-ion battery technology, which is seen as the most promising alternative to the costly nickel- metal hydride batteries that power most current-generation electric vehicles.37 Lagging U.S. Competitive Position At present, the U.S. produces only about 1 percent of the world’s lithium batteries, and until recently, it faced the prospect of “entering the age of electrified vehicle transportation without a domestic advanced battery manufacturing industry.”38 The implications were particularly troubling for Michigan, whose economy is far more dependent on motor vehicle manufacturing than that of any other state.39 Underscoring the vulnerabilities of 34 In 2011, the Boston Consulting Group forecast that electrified vehicles (hybrids, plug-in hybrids, and pure electric) would account for 9-12 percent of the U.S. vehicle market by 2020, up from 3 percent in 2010. Center for Michigan, Special Report: Michigan Goes Big on Batteries, 2011. Daniel Sperling of the University of California at Davis points out that state and local governments across the United States have implemented numerous policies to promote electric vehicles, subsides for manufacturers and government-sponsored R&D. California also requires a 10 percent reduction in the carbon-intensity of all fuels, providing an additional incentive for the adoption of electric drive vehicles. Daniel Sperling, “Incentives for the Electric Vehicle Market,” in National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, op. cit. 35 Ford CEO Alan Mulally said in 2012 that battery packs for his company’s Focus electric car cost $12,000 to $15,000 apiece, raising the cost of a car that would normally sell for $22,000 to $39,200. Wall Street Journal, “Ford CEO: Battery is Third of Electric Car Cost,” April 17, 2012. 36 In 2010, the government of South Korea pledged to commit 15 trillion won (14 billion dollars) to develop the country’s rechargeable battery industry in the next decade.. “Korean Firms Set to Lead Rechargeable Battery Market,” Korea Herald Online. July 26, 2010; In 2010, China began construction of its first Lithium-New Energy High Tech Industry Base in Yichun, Jiangxi Province, with output value expected to exceed $14 billion by 2020. The 20 square km site will be an economic service zone for manufacturing and recycling lithium batteries and associated research and development. An industrial chain will be established on the site, and “the zone is expected to become a new energy automobile manufacturing base.” Yichun has the world’s largest lithium mine, accounting for 12 percent of the world’s reserves. “East China to Get First Lithium High-Tech Zone,” Xinhua April 10, 2010. 37 A lithium-ion battery produces electrical charges by lithium ions that flow between an anode plate and a cathode plate. The liquid chemical mixture in the battery (electrolyte) contains lithium salts and an organic compound. National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, op. cit. p. 5. 38 Ibid. p. 1. 39 Michigan is seven times more dependent on the auto sector than any other state.

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78 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES TABLE 4-2 Michigan Advanced Battery Tax Credits Value (Millions Credit Topic of Dollars) Beneficiaries Pack Manufacturing Manufacture of 255 GM, Ford, JCS plug-in hybrid and traction battery packs Vehicle Engineering Expenses for 135 GM, Ford, battery Chrysler integration, prototyping, and launch Advanced Battery Engineering 30 Ford Technologies activities Engineering Cell Manufacturing Capital 600 JCS, Dow investments Kokam, A123 in cell Systems, LG manufacturing Chem, Xtreme facilities Power, fortu Power SOURCE: Michigan Economic Development Corporation. import-dependency for a strategic technology, as of October 2012, a total of ten antitrust lawsuits were pending against Asian makers of lithium batteries by battery-consuming companies, alleging price-fixing.40 Absent a domestic production base, U.S. industrial consumers of lithium batteries are exposed to the price manipulation of offshore syndicates. Michigan’s Promotional Efforts Since 2008, Michigan has made the nation’s most significant commitment to the development of electrified vehicles, offering over $1 billion in grants and tax credits to manufacturers of lithium-ion battery cells, packs, and components. Michigan also invested in research centers and worker training programs for electrified vehicles. The state’s investment was substantially augmented by federal grants under the 2009 American Recovery and 40 “Lithium Battery Manufacturers Accused of Price-Fixing,” Lithium Investing News November 12, 2012.

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STATE STRATEGIES FOR INNOVATION 79 Reinvestment Act to producers of lithium-ion cells, packs, and materials.41 State tax credits have proven to be powerful tools, “literally cash to the companies” offsetting investment requirements, whether for plant equipment or processes. $1 billion in refundable tax credits for batteries was “completely bid out.”42 Half of the federal stimulus money went to Michigan.43 The federal government provides other support measures for advanced batteries and electrified vehicles:  The government has made $25 billion in debt capital available to automakers to finance the development of more energy-efficient vehicles pursuant to the Advanced Technology Vehicles Manufacturing Program (ATVM).  The Department of Energy has funded R&D in battery technology pursuant to its Vehicles Technology Program.  DOE heads a government-industry partnership, the U.S. Advanced Battery Consortium, which funds projects for the commercialization of new battery technologies and the establishment of industry performance targets.  The battery industry has benefitted from $4.5 billion in investments pursuant to the Recovery act in smart-grid technologies.  DOE’s Advanced Research Projects Agency-Energy (ARPA-E), a program that funds “transformational” energy technology has allocated $100 million to energy storage research.  The federal government offers a variety of tax incentives, which benefit the advanced battery industry.44 The advent of state and federal incentives produced a flurry of investment in the advanced battery sector in the state of Michigan. In 2010, Governor Granholm noted that 16 advanced battery projects were under way and that “a whole advanced battery supply chain is taking root from the Detroit area to the shores of Lake Michigan,” including companies making anodes, cathodes, separators, and electrolytes, as well as firms integrating them into 41 National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, op. cit., pp. 1-2. 42 Doug Parks, Michigan Economic Development Corporation, “Building on Battery Initiative in Michigan,” National Research Council, Clustering for 21st Century Prosperity: Summary of a Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2012. 43 Sridhar Kota, White House Office of Science and Technology Policy, June 26, in National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, op. cit. 44 The Advanced Energy Manufacturing Tax Credit program provides $2.3 million to companies to cover 30 percent of investments in new, expanded, or refurbished factories producing renewable- energy equipment. U.S. consumers purchasing electrified vehicles are eligible for tax deductions. National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, op. cit., pp. 7-8.

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80 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES Box 4-1 Training an Electric Vehicle Work Force Ann Marie Sastry of the University of Michigan, who has been directing battery research for more than a decade, pointed out at the symposium on the battery industry for electric drive vehicles that “the current graduation rate from U.S. university electric power engineering programs is not sufficient to meet our nation’s current and future needs.”45 In an effort to address the skills shortfall, Wayne State University in Detroit is developing a comprehensive curriculum for degree programs for batteries and electric-drive vehicles. This effort, mounted n collaboration with Macomb County Community College and Next-Energy, a nonprofit, is funded by DOE and its advisory board includes representatives of GM, Ford, and TARDEC, the U.S. Army’s organization for tank automotive research. The program offers a master’s degree in electric-drive vehicle engineering, a bachelor’s in electric transportation, and at Macomb, associate degrees in automotive and electronic engineering technology. The university is working closely with the electric drive vehicle industry to ensure that its coursework is relevant to industry needs, and students can use industry laboratories for practice and experiments. New laboratories are being developed for this program, including an energy-storage laboratory with three levels: (1) new materials, cell assembly and fabrication of cathodes and anodes; (2) vehicle integration; and (3) characterization of cells and relevant topics such as thermal management. A second new laboratory is dedicated to electric propulsion. Courses began in the fall of 2010.46 battery packs and electric vehicles. “The whole spectrum is right here in Michigan.”47 45 Ann Marie Sastry, “The University/Startup Perspective,” National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities— Summary of a Symposium, op. cit. Work force needs of the advanced battery industry vary along the supply chain. For electrode manufacturing, skilled workers are needed for mizing, coating, calendaring and alip-punch processes. Competencies required for cell production include dry-room, electrode-stacking, assembly and formation processes. Other required skills include pack assembly and testing. Training and education requirements for manufacturing positions range “all the way from high-school degrees to Ph.Ds.” Robert Kamischke, EnerDel, “Workforce Needs and Opportunities,” National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, op. cit. 46 Simon Ng, Wayne State University, “Technical Training and Workforce Development,” National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, op. cit. 47 Summary of remarks of Governor Jennifer Granholm, July 26, 2010, in National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, op. cit., p. 11.

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STATE STRATEGIES FOR INNOVATION 81 The Foreign Competitive Challenge Even with this promising beginning, Michigan’s nascent electric vehicle cluster confronts daunting long run challenges. Even with government and industry investments in an advanced battery supply chain, an executive at Johnson Controls, whose joint venture, Johnson Controls-Saft makes lithium-ion batteries for hybrid vehicles, commented in 2010 that most of this company’s key suppliers were still based overseas—“we really like to work with local suppliers,” but the cells separators and cathode materials for lithium-ion batteries were “pretty much coming out of Europe, Japan, and Korea.”48 Forecast demand for electric vehicles has not materialized in the U.S., confronting Michigan’s emerging battery industry with overcapacity—an executive at Ann Arbor’s Center for Automotive Research commented in 2012 that “too much battery capacity has been built for the market to even remotely justify.”49 In October 2012, A123 Systems, a lithium-ion battery maker with several sites in Michigan, filed for bankruptcy and subsequently accepted a bailout offer from China’s largest auto parts maker, Wangxiang Group Corp.50 Korea-based LG Chem, with a lithium-ion battery plant in Holland, Michigan, furloughed the plant’s 200 employees in 2012 and was reportedly supplying batteries for the Chevy Volt from its factories in Korea.51 Michigan’s fledgling battery industry faces stiff foreign competition. Despite recent investments in U.S.-based battery production, “many newer electric car models, such as Renault’s Zoe, are still getting their batteries from Asia, where the battery industry has had many years’ head start.”52 U.S. battery makers have turned to Asian firms for the technology needed to enter the lithium-ion battery industry.53 A number of the leading Asian battery makers are 48 Tom Watson, ”A Battery Manufacturer’s Perspective,” in National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities— Summary of a Symposium, op. cit., p. 58. Japanese manufacturers control 70 to 100 percent of the world market for some key components for lithium batteries. “Major Investment Needed to Pull Ahead in Electric Car Battery Market,” Chosun Ilbo Online, July 13, 2010. 49 “Here Comes Michigan’s Battery Industry—But Where are the Electric Vehicle Buyers?” Crain’s Detroit Business March 6, 2012. General Motors halted production of the Chevy Volt in March 2012, citing poor sales. Crain’s Detroit Business commented that “the sales numbers couldn’t be clearer: for now, people don’t want electric cars. Or, more specifically, people don’t need electric cars. Despite recent spikes, gas prices have remained relatively low since the downturn.” Ibid. 50 “Troubled Battery Maker A123 Fell Short on Job Creation and Defaulted on Some of its Debt,” Grand Rapids Press October 17, 2012. 51 “Why the New U.S. Battery Industry is Still Struggling,” Washington Post. October 3, 2012. 52 Ibid. 53 Japan holds over two-thirds of all the patents for lithium-ion battery technology registered at the U.S. Patent Office. “Korea Leads in Battery Production but Lacks Innovation,” Chosun Ilbo Online April 6, 2011. The head of automotive systems for A123 Systems, a U.S.-based maker of lithium batteries was asked in 2011 why his company had opened its first production sites in China and Korea. He said “that’s where the supply base was. That’s where the know-how was. It was non- existent in the U.S.” To establish its plants in the U.S., “we call it ‘copy exact’. We bought a company in Korea that had the technology around that type of battery and had developed the

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82 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES Box 4-2 Consequences of Erratic Funding At the Symposium on the U.S. Battery Industry for Electric Drive Vehicles, Mohamed Alamgir, the research director of lithium-ion battery maker Compact Power, spoke of the effects of erratic funding on the evolution of the U.S. industry. Acknowledging recent federal and state financial support, he said that if such help had been available 25 years ago, “I wouldn’t have had to go through five companies during my career in lithium-ion batteries. If you do a study on what went wrong and right in lithium-ion, you can use me as a case example. This kind of funding was not there before. It was very spotty, which is why we were in trouble.” Between 1985 and 1995, he worked at EIC Laboratories in Boston which “survived completely” on funding from the SBIR program. He noted that Duracell, which at one time “was the house to go to for research related to lithium batteries,” dismantled its lithium-ion research operations “after a series of takeovers.” Alamgir was part of three battery companies that disappeared and he listed failed lithium-ion companies including Energizer, Moltech, Polystor, Motorola ESG, Firefly, Imora, MoliCell, and ElectroEnergy. “Early battery companies couldn’t get enough funding to survive against tough competition from Japanese and Korean companies.” He concluded from this history that “the government does need to support research in the future, just as the Japanese government did in the 1990s with their “New Sunshine Program.”54 incorporated in huge industrial conglomerates and have the financial resources necessary to withstand years of low sales levels as the electric vehicle market evolves.55 Korea’s battery makers, which include LG Chem Co., Samsung SDI Co. and SK Energy, “have been supplying batteries for their affiliate companies …, which has boosted their sales.”56 manufacturing process there. We basically brought that here, copied it exactly, and scaled it up.” A123 also brought six Korean engineers to the U.S. and sent a team of Americans to Korea for training. “Does America Need Manufacturing?” New York Times August 24, 2011. 54 Presentation by Mohamed Alamgir, National Research Council, Clustering for 21st Century Prosperity: Summary of a Symposium, op. cit. 55 LG Chem, a major Korean producer of lithium-ion batteries, was nearly shut down twice, in 2001 and 2005, because of complaints from executives in other parts of the LG Group about poor battery sales. The group’s Chairman, however, Koo Bon-moo resisted these calls, and the company eventually secured supply contracts with 10 automakers, including Ford, Renault, Volvo, and Hyundai. “Electric Vehicle Batteries Power Korea Ahead,” Joong Ang Daily Online, April 19, 2011. 56 “S. Korean Battery Makers Fast Catching Up with Japanese Rivals: Nomura,” Yonhap June 24, 2010.

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STATE STRATEGIES FOR INNOVATION 83 The conundrum confronting the U.S. battery industry is the technological reality that despite rapid technological progress, current- generation vehicle batteries still cost too much and deliver too little with respect to performance, resulting in stagnant consumer demand. This problem will at some point be resolved through innovation, although the time horizon over which this will occur remains unclear.57 Michigan’s battery initiative underscores pitfalls confronting innovation-based economic development. The state has been effective in mobilizing its own and federal funds to stimulate the emergence of a battery production industry chain within the state, raising the prospect that the U.S. may be able to avoid foreign dependency on a key technology in the auto industry in the future. However, the demand side of the equation remains a critical unknown as the fledgling U.S. battery makers struggle with stagnant ales and foreign competition. The same type of challenge confronts Toledo’s emerging photovoltaics cluster, and raises the question whether states, by themselves, have the resources and the stamina to support industries of the future through what may prove to be very long periods of gestation. LESSONS LEARNED  State government economic development efforts, traditionally centered on incentives-based industrial recruitment, are now also emphasizing knowledge-based initiatives and the creation of innovation clusters.  Recruitment-based development efforts centered on research universities have proven effective (Research Triangle Park in North Carolina, Tech Valley in New York State)  As the experience of Michigan’s Battery Initiative demonstrates, even very well-endowed state innovation initiatives face daunting challenges, including demand uncertainties intrinsic to investments in industries of the future, formidable foreign competition, and gaps in U.S. industry chains. 57 In November 2012, DOE announced that it was creating a new “Joint Center for Energy Storage Research” (JCESR) at the Argonne National Laboratory, a $120-million effort to develop batteries that are 5 times as powerful as and 5 times cheaper than current batteries within five years. “DOE wants 5x Battery Power Boost in 5 Years,” Computerworld, November 30, 2012.

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